Credit Spread Adjustment Strategies Options Traders Should Know
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- เผยแพร่เมื่อ 10 ก.ย. 2024
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The credit spread options strategies are the simplest, yet most powerful strategies available to premium sellers.
In this video, we'll explore strategies that can be used to:
1) Significantly reduce loss potential without giving up too much profit potential.
2) Increase profit potential AND decrease loss potential, at the expense of a lower probability of profit.
The first strategy is rolling the long option closer to the short option, and the second strategy is adding another credit spread to the initial credit spread to create an iron condor/iron butterfly position.
We'll use real trades we've put on in the projectoption porftolio to demonstrate the adjustment strategies.
The platform used in this video is the tastyworks trading platform, which offers highly competitive commissions for active options traders, and allows users to easily analyze options strategies like we did in this video. tastytrade, Inc. (“tastytrade”) has entered into a Marketing Agreement with Project Finance(Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade and/or any of its affiliated companies. Neither tastytrade nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. tastytrade does not warrant the accuracy or content of the products or services offered by Marketing Agent or this website. Marketing Agent is independent and is not an affiliate of tastytrade.
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New to options trading? I am sincerely grateful for your very clear and detailed explanation.
I am learning a lot from your videos. These adjustment strategies are clearly explained and I am also becoming more familiar with TW.
Thanks for the comment! Stay tuned for more tastyworks videos.
-Chris
This is the video I need it the most right now as the NFLX and TSLA are testing the short strikes of the spreads I have open.The adjistments explained in the video are on TastyWork platform..the one where I trade with. Big help and lesson at the right time..
Thank you Chris
You're welcome, Daniel! I am glad you got something out of the video, and it's great that you're also on tastyworks. Stay tuned for more tastyworks/options videos soon and let me know if you ever have any suggestions.
-Chris
This was great, I been tryin to find out about "best option trading newsletter" for a while now, and I think this has helped. Have you heard people talk about - Winoorfa Option Olegroson - (should be on google have a look ) ? Ive heard some awesome things about it and my cousin got cool success with it.
Hey Mike thanks for that advice on the spreads because I recently convent a vertical spread into an iron condor because the initial trade was went into the money almost immediately and I was able to mitigate the loss by selling another put spread
Haha thanks for watching. And it's Chris! Not Mike.
projectoption Sorry about that.
I don’t think you have an Iron Buttery, rather a broken wing butterfly, based on your risk graph of your first position discussed.
So with the NVDA example, you basically turned your put credit spread into an iron condor.
Your explanations are awesome, xtal clear, thxs Chris!
Thanks so much for watching and commenting!
Special thanks to the team. Excellent solutions to live problems
You're welcome! Thanks for the comment!
Thank you❤
Hello chris, i have a question regarding adjustments. Why someone buy initially a protection which will never use (from the moment that before this protection get triggered you will have already adjust the trade) ??. Why just do not go to take the full profit and place a stop loss order?
Very clear explanation. Great video Chris!
Thank you!
Great video! is this reason enough to trade wide spreads? what width would you recommend?
Can these adjustments be done after few days after taking credit spreads and realising that it is going wrong?
Great tutorial! Thanks Chris. Greg H.
Glad you liked it! Thanks for leaving all these comments, Greg!
-Chris
Making traders profitable
What happens to the collateral cash if you adjust a pcs by selling a call credit spread ?
In the second adjustment why does the wave line never approach the max profitability when it’s above the break even? Do you essentially have to hold the position to expiration to realize the maximum profitability in the second adjustment scenario?
Breakeven prices only matter AT expiration. Before expiration, breakeven prices don't mean anything. For a credit spread to reach the maximum profit potential, the spread price has to reach $0, which occurs when both options are out-of-the-money at expiration, or significantly OTM before expiration.
While the strategies are useful, they are not "adjustments" in the sense of what to do if the spread is challenged by the market. Essentially they are a way of "locking in" the profit that you have already made and hence the are only useful if the credit spread is already making making.
What would be more useful is what should be done in case the market moves against you immediately after you put on a credit spread
Nice channel
Iron Butterfly? Seriously?
You choose the most complicated options trading instrument to explain a basic strategy?
The first adjustment looked interesting until I checked the numbers against an actual options chain for SPY. For adjusting a $6 wide spread to a $3 spread, the amount of potential profit sacrificed ran from 49% to 62% (for reducing risk by 1/2). You state that you achieved a 1/2 reduction in risk with only a 5% sacrifice of profit. I can't find any evidence that this is actually possible. Perhaps you can explain under what conditions you would be able to find pricing like that; it's obviously a very unique and uncommon situation.
I think the first adjustment could still be useful at times, but certainly no where near as attractive as this video represents. Viewers should beware and check the claims themselves, as I did.
I believe you are looking at the adjustment on the same day as trade entry (by looking at the price of the position right now, and then the price of the position again with the adjustment).
The adjustment only works if time passes and/or the stock price moves in favor of the credit spread, at which point the long option can be rolled for much cheaper than it could be right when the trade was entered.
@@projectfinance So, you're relying entirely on time decay for this adjustment to be beneficial then; if price moves in favor of the spread, no adjustment would be necessary, so that condition is unimportant.
Since the passage of time is necessary for the adjustment to 'ripen', it's not very useful if the spread is challenged shortly after it is opened, and probably not at all for short-term spreads (say three weeks or less). Those would be good caveats to mention in the video.
The 2nd. adjustment looks like you make an iron condor
Hi Mazen,
That's correct. The second "adjustment" is converting the single credit spread into an iron condor by selling another spread against the existing spread. If the added spread is the same width and in the same expiration as the existing spread, the additional spread will reduce loss potential and increase profit potential, but decrease the overall probability of profit.
-Chris
Mommy,..
Thank you❤